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      Tuesday 19 November 2019

      German Transfer Pricing regulation: Federal Fiscal Court confirms change in jurisdiction


      Managing director as representativeGerman Transfer Pricing regulation: Federal Fiscal Court confirms change in jurisdiction.




      If a shareholder resident in Germany grants a loan to 'his' foreign subsidiary, he always reveals a latent default risk, especially if the loan is not properly secured. In the opinion of the tax authorities, the expense resulting from an adjustment ('write-off') is regularly not deductible for tax purposes. The tax authorities consider the lack of security as a condition that is not at arm's length and pursuant to Sec. 1 of the Foreign Tax Act, therefore add the expenses to the taxable income accordingly. Until a few months ago, the German Federal Fiscal Court consistently rejected such cases in which Germany had concluded a double tax treaty and could only entail a correction of the agreed priced but could not lead to an additional correction. In two recent decisions, the Federal Fiscal Court now confirms the court's change in case law.

      First decision 

      A German limited liability company (KG) held 100% shares in a Chinese limited liability company (Ltd.). The KG had outstanding trade receivables, which were not settled over a period of several years. The receivables were unsecured and non-interest-bearing. In 2007 and 2008, the KG declared a partial waiver of the receivables and partially wrote the receivables off. According to the Federal Fiscal Court, the lack of agreed securities was not at arm's length in the sense of Sec. 1 Foreign Tax Act, i.e. the expenses must be added to the taxable base. Latter shall be in line with the relevant double tax treaty.

      Second decision

      In the second case, a German limited liability company (GmbH) held 50% shares in an Austrian GmbH. The German company had granted interest-bearing and secured loans to its subsidiary and had given a guarantee to it's main bank in favour of its subsidiary. The subsidiary went bankrupt, the GmbH wrote-off the loan and considered an accrual in the balance sheet in terms of the guarantee. Also, in this case, the Federal Fiscal Court failed to recognise the expenses for tax purposes, mainly with the same reasons as the first case. Additionally, the Federal Fiscal Court also commented on the 'Hornbach judgement' of the European Court of Justice and decided that this also could not result in a restriction of Sec. 1 Foreign Tax Act (AStG) in the present case.


      The general conditions for financing within an international group have changed considerably, although in many cases losses from intra-group receivables or loans are not tax-deductible under national tax law (Sec. 8b (3) German Income Tax Act).

      For more information, contact:

      Benno Lange, Partner
      Dirk Rossman, Partner
      dhpg, Germany
      E Dirk.Rossmann@dhpg.de

      Date: October 2019

      Due to The Federal Act on Tax Reform (TRAF), Swiss special income tax regimes considered harmful (in particular holding companies, mixed companies and domiciliary companies) will be abolished by 1 January 2020 and replaced by internationally accepted measures. 

      Date: October 2019
      Date: October 2019
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